FİNANSAL PİYASALAR VE KURUMLAR - Deneme Sınavı - 3

The clearinghouse of the exchange provides a guarantee to the winning party that if the counterparty refuses to pay, the clearinghouse will pay instead.

The OTC contracts are customized contracts, and they are less liquid than exchange-traded derivative contracts. They are also relatively less transparent.

Futures contracts are the same as forward contracts except that futures contracts are organized, regulated and managed by an exchange. In other words, futures contracts are standardized.

MMY = BEY*(360/365) 

MMY = (3.8%)*(360/365) = 3.75%

A contingent claim is a derivative that provides a buyer of option the right to buy or sell an underlying asset at a price previously agreed upon on a specified future date. Unlike forward commitment contracts, contingent claims give the holder of the contract the right, not the obligation to buy or sell an underlying asset.

Options can also be divided into two types according to the time when options can be exercised: American options and European options. American options can be exercised any time up to the expiration date, while European options are exercised only on the expiration date.

The OTC contracts are customized contracts, and they are less liquid than exchange-traded derivative contracts.

Payoff to long forward = Spot price at expiration − forward price

Put option contracts grand their buyers the right but not obligation to sell the underlying asset.

Options are contingent claim contracts that provide the right but not the obligation to buy an asset at a specific price at a later date in the future.

A swap contract can be defined as an OTC contract between two parties who agree to exchange cash flows on regular dates, where one party pays a variable payment, and the other party pays either a fixed or variable amount calculated on a different basis.

Futures contracts are the same as forward contracts except that futures contracts are organized, regulated and managed by an exchange.

It is an OTC contract in which a buyer and a seller commits each other to do a transaction on a specific underlying asset at a future date at a previously determined fixed price.

A swap contract can be defined as an OTC contract between two parties who agree to exchange cash flows on regular dates, where one party pays a variable payment, and the other party pays either a fixed or variable amount calculated on a different basis. Since swap is an OTC contract, it contains terms and conditions such as the identity of the underlying asset, dates of payments, and the procedure of payment that are agreed upon and written in the contract. In currency swap trades, one party trades swaps currency for a fixed interest rate and where another party trades another currency for a floating interest. Traders usually exchange only the difference in interest payments. In swap trades, the principal traded is called notional.

T = 3/12 = 0.25

F0(T) = S0(1+ r)^T = 120*(1+0.12)^0.25=123.45

American Options can be exercised any time up to the expiration date, while European Options are exercised only on the expiration date.

Similar to futures and forward contracts, swap contracts do not require money exchange at the beginning of the contract, the initial value of a swap contract is zero.

LIBOR stands for London Interbank Offered Rate, which is the floating rate used in swap contracts.

Later in 1981, the first official swap was traded between the World Bank and International Business Machines. Since then, investment banks started providing swap services and the volume and liquidity started to grow and “plain vanilla” swaps were introduced. Plain vanilla swaps are the most famous swap contracts that pursue the conventions of the International Swaps and Derivatives Association Butler. Plain vanilla swap for fixed-for-floating interest rate swap is the most popular type of swap that was introduced to the market in the 1980s.

The payoff for futures contracts is: spot price at expiration - the forward price

V_T= S_T – F₀(T)

V_T= 100 x $4,900 - 100 x $5,300

V_T= -$40,000 

Therefore the payoff for the party with short position is $40,000, since it will be exactly opposite to the payoff to the long position.

The main variables used in the Black-Scholes model include:
• Price of underlying asset, which is a current market price of the asset
• Strike price, which is a price at which an option can be exercised
• Volatility, which is a measure of how much the security prices will move in the subsequent periods. Volatility is the trickiest input in the option-pricing model as the historical volatility is not the most reliable input for this model
• Time until expiration, which is a time between calculation and option’s exercise date
• Interest rate, which is therisk-freeinterest rate.

A swap contract can be defined as an OTC contract between two parties who agree to exchange cash flows on regular dates, where one party pays a variable payment, and the other party pays either a fixed or variable amount calculated on a different basis.

It is clear that with globalization, a change process has started in the national economies. Because of this change process, the integration between the economic units has accelerated and the risks to which financial markets are exposed have increased considerably. The inadequacy of traditional instruments in managing these risks paved the way for the development of derivative instruments.

Derivative instruments whose performance is determined by underlying assets are generally classified as forward, futures, swap, and option contracts.

As also understood from the information given, the answer is E. All of them are classified as derivative instruments whose performance is determined by underlying assets.

A derivative as defined by Security and Exchange Commission (SEC) is: “a type of financial instrument whose value is derived from another underlying product”. By derivative product, we mean those financial instruments that derive its value from the performance of an underlying (asset). In other words, a derivative is a legal contract that involves two parties, a buyer and a seller who agree to do something for each other. Derivative contracts are recognized by the legal system as commercial contracts and they set the right and obligations of each involved party. For instance, let’s assume that there are two parties, A and B. In the contract, Party A agrees to sell an APPLE stock (AAPL) to party B for $200 after 3 months from now. Here, our underlying asset is AAPL and Party A is obligated to sell this stock to party B after 3 months. The value of this contract is based on the performance of AAPL. If the value of the stock rises from $191to $200, this contract will be valuable for Party B who is buying the underlying asset for $191. If AAPL price increases to $200 and Party A refuses to sell the stock to Party B, Party B can refer to the related authorities (lawyers, judges, and juries) to step in and resolve this issue.

As also understood from the information given, the answer is E. All of the statements related to derivatives in the options are correct.